Not Very Bright

Time and again, the events of the past few years have shown just how little equity investors know or understand about the big picture. The charitable view is that they are so focused on "the trees" (i.e., individual stocks) that they miss what is happening in the forest as a whole. The more realistic assessment, based on my experience in a number of different markets, is that stock traders as a group aren't very bright and have a hard time dealing with complexity and issues that require more than a minimal degree of brain power. While there are certainly exceptions to this rule -- some very notable -- the truth is that most equity types -- including those who describe themselves as "analysts" and "strategists" -- couldn't think their way out of a paper bag. Knowing that, it's not hard to see why, as Bloomberg BusinessWeek reports in "Gloomy Bond Investors Clash With Upbeat Stock Managers," the equity folks don't quite get what is plain for all to see:

Bond and stock investors often differ, but at a key moment for the economy, the contrast between their outlooks is stark

It's often said that stock investors, eager for gains, see the glass as half full, while bond investors, careful about losses, see the glass as half empty. Now, however, their views are so different that you might wonder if they're peering at the same glass. Many investors have withdrawn money from the stock market, especially as weak U.S. economic data have bolstered bond managers' case for a gloomier outlook. The U.S. job report on July 2 showed the U.S. economy lost 125,000 jobs in June.

"All these [economic] numbers show this is still a very fragile recovery," says Darrin Smith, portfolio manager of the $3-billion Principal High Yield Fund. "GDP expectations will continue to come down."

The Standard & Poor's 500 index is down 8.3 percent so far in 2010. But speak to the managers of many stock mutual funds, and they sound enthusiastic about the opportunities. "We're in very favorable conditions for equities, especially when you look long-term," says Conrad Herrmann, manager of the Franklin Flex Cap Growth Fund, a stock fund with $1.7 billion in assets.

The Market Vs. Individual Stocks
It's not that stock managers are ignoring the economy or other worries that bother bond managers, such as the European debt crisis or the impact of new regulations from Washington. Rather, they're focused on individual stock prices and see great bargains. "There is a real disconnect between how these companies are doing and how these stocks are doing," says Craig Hodges, co-manager of the Hodges Fund, a $360-million fund that invests in a wide range of U.S. stocks.

In the first quarter, earnings for the S&P 500 rose 54 percent from a year ago. According to Bloomberg, analysts expect earnings to rise 34 percent year-over-year in the second quarter. The S&P 500's price-to-earnings ratio—a common way of measuring how cheap or expensive stocks are—is at 14.8, down from 17.7 on Apr. 23. The average p/e ratio for the past 20 years is 20.4. "The market is now dominated by other forces than fundamentals," Hodges says. "In a couple years you'll look back and say this was the time to be buying."

The problem is it's hard to know when difficult conditions for equity investors will end. "On a short-term basis, there is a lot of doom and gloom," says Dan Genter, president of RNC Genter Capital Management, who manages both stock and bond funds. He expects a long period of quite slow growth in the U.S., making the economy—and stocks—vulnerable to negative growth for quite some time.

Balance Sheets in Need of Repair
Jason Doiron, co-manager of the Sentinel Conservative Allocation Fund, predicts "a long, slow grind" for an economy burdened by debt. "It's going to take time to repair the damage that leverage caused [to] corporate, personal, and government balance sheets." In such an environment, bonds could have the advantage. "Bonds will do well with a lower economic growth rate than stocks will," says USAA Investment Management bond manager Matthew Freund. Growth will be enough to ensure companies can repay creditors—i.e. bondholders—but not enough to provide the sales and profit growth that equity investors treasure.

"Bonds are in the sweet spot," Freund says. "The stock market might be a little disappointed."

Those bullish on stocks are trying to keep their focus long-term and ignore the scary headlines and the market's foul mood. "Everybody is on pins and needles," says Peter Andersen, an equity portfolio manager at Congress Asset Management in Boston. "Any slight negativity is magnified." Asked to cite risks that most concern them, managers of all stripes cite the oil spill in the Gulf of Mexico, which is hurting both the overall market mood and the energy sector; the European debt crisis; the possibility of slower growth in China; uncertainty about the impact of federal legislation, such as the financial reform bill; and the state of the U.S. economy.

Herrmann, the Franklin equity manager, says some of these concerns will fade with time. Also, U.S. companies have advantages. "They've been hoarding cash, [which] gives them tremendous flexilibity," he says, while emerging markets continue to grow quickly and the prices of stocks are "extremely attractive."

A key test—which could change market sentiment about equities—could be the second-quarter earnings season, Hodges says. That begins on July 12, when Alcoa unveils results. Profits—and CEOs' outlook for the rest of 2010—could give investors a better sense of the headwinds facing equities and whether those are troublesome enough to stick with bonds.

Comments

[francismarion]

This'll put the apoplexy back in yer Apocalypse. Newsreal.blog reports that the head of NASA in an interview with Al-Jazeera said that Obama ordered him to begin turning over rocket technology to Moslem countries. Meanwhile he's laying off engineers right and left, gutting various programs. How Nobel!

[Andy Crowder]

Hopefully this will help some of you bulls (and bears).

http://www.crowderoptions.com/where-are-we-headed/

[maybe there won't be a forest....]

Almost Every Cleanup Worker From The 1989 Exxon Valdez Disaster Is Now Dead

Are you sure that you want to help clean up the oil spill in the Gulf
of Mexico? In a previous article we documented a number of the health
dangers from this oil spill that many scientists are warning us of,
and now it has been reported on CNN that the vast majority of those
who worked to clean up the 1989 Exxon Valdez oil spill in Alaska are
now dead. Yes, you read that correctly. Almost all of them are dead.

In fact, the expert that CNN had on said that the life expectancy for
those who worked to clean up the Exxon Valdez oil spill is only about
51 years. Considering the fact that the oil spill in the Gulf of
Mexico is now many times worse than the Exxon Valdez disaster, are you
sure you want to volunteer to be on a cleanup crew down there? After
all, the American Dream is not to make big bucks for a few months
helping BP clean up their mess and then drop dead 20 or 30 years
early.

http://tinyurl.com/25jphwo